The Supreme Court of Vermont Law Blog: An on-going conversation about the practice of law in Vermont, featuring summaries of Vermont Supreme Court decisions, a dollop of lampooning, legal analysis, and a charming aggregation of creative thought.

Pages

Thursday, November 7, 2013

We’re on your side (for the time being)

You know those commercials insurance companies put out—the
we’re-on-your-side-and-we’re-always-there-for-you types of ads? I’m going
to guess those are ruined for the defendants in this case.

Subrogation is an interesting and sometimes complicated concept. It’s basically the idea that when an
insurance company pays their insured and someone else is at fault, the
insurance company has a right to collect from the at-fault person. Because the right to recover flows from the
insured, the insured has an obligation not to settle away the insurer’s right
to recover; consequently, if the insured does settle away the insurer’s rights,
then the insured is responsible for paying back the money the insurer paid the
insured in the first place under an implied trust.

This case is an illustration in how this concept can work—or not
work, depending on your perspective.

The facts are straightforward.
Defendants are husband and wife.
Wife was involved in an auto accident.
Their insurer, GEICO, paid wife’s medical bills under the policy up to
the policy limit of $10,000. That
payment was pursuant to a subrogation clause, and GEICO notified the other
insurer, Liberty Mutual. Defendants then
settled with Liberty Mutual, including GEICO’s liens (whatever they might be),
for $30,000, but did not pay GEICO.

So GEICO sent a demand letter to defendants and later filed suit
against them. For whatever reason, Liberty
Mutual avoided being brought into the proceedings—GEICO apparently didn’t try
real hard to bring Liberty Mutual in—and the statute of limitations ran against
Liberty Mutual. Of note: GEICO asserted
in its initial pleadings that Liberty Mutual didn’t know about GEICO’s lien, but
during discovery, it came out that Liberty Mutual indeed had been notified of
GEICO’s lien.

Both parties shot for summary judgment, but GEICO won the
draw. The trial court granted GEICO’s
motion based on breach of contract and the “trustee theory” of settlement
proceeds, which means that when two (or more) parties are entitled to
settlement proceeds, the party that receives the proceeds holds the other
party’s portion in trust.

Defendants were ordered to pay GEICO the $10k, offset by their
costs, and they appealed.

When the SCOV reviews a summary judgment decision, there’s no
deference and the SCOV uses the same standard as the trial court: if there’s no
issue of genuine material fact, then the SCOV asks whether either party is
entitled to judgment as a matter of law.

Defendants make nine claims for reversal, which the SCOV divides into
two general categories: “those that relate to whether GEICO can recover from
defendants, and those that relate to the amount that GEICO can recover from
defendants.”

The defendants’ first set of arguments is essentially that GEICO
should have sued Liberty Mutual, and not them.
The SCOV notes that GEICO indeed could
have sued Liberty Mutual, but it was not required to do so. Because defendants were paid by GEICO and
then paid by Liberty Mutual an amount that included GEICO’s liens, then the
defendants should have held GEICO’s
portion in trust. Otherwise, defendants could
get, at least theoretically,a double
recovery. Accordingly, the SCOV holds
that suing the other insurer is not a prerequisite for suing the insured—even
though GEICO would have had a cause
of action against Liberty Mutual because Liberty Mutual had notice of GEICO’s
lien before it settled with defendants, GEICO wasn’t required to sue Liberty
Mutual before or instead of suing the defendants. The SCOV affirms the trial court’s trustee theory,
which is “well established in insurance law.”

The SCOV notes that the statute of limitations running against
Liberty Mutual has no bearing on GEICO’s ability to collect from defendants—the
claims are not mutually exclusive.

The defendants’ argument regarding laches (waiting too long to
bring a case, even if the statute of limitations hasn’t run) doesn’t get far at
all. The SCOV reasons that there has to
be prejudice and concludes that the defendants haven’t shown the requisite
prejudice.

The defendants’ next argument is essentially that because GEICO
initially proceeded on a breach-of-contract theory, when notice to Liberty
Mutual was discovered, that meant that GEICO’s case against defendants was
done. Not so, says the SCOV again noting
the applicability of the trustee theory and GEICO’s ability to plead
alternative grounds for relief.

The defendants’ next argument is closely related. Defendants claim that GEICO waived its
subrogation rights when it hid notice to Liberty Mutual from them and the trial
court. The SCOV notes that this is not
really a waiver argument—more an argument for sanctions—and the SCOV declines
to find a waiver when none really has been shown.

The SCOV holds, therefore, that GEICO’s claim against the
defendants is viable.

But the SCOV departs from the trial court on the amount that GEICO
can recover. Defendants’ argument in
this regard is that GEICO has to show what portion of the settlement went
toward medical payments. This raises a
question of first impression for the SCOV, which the SCOV articulates as such:
“[W]hen an insured settles with a tortfeasor and holds that recovery in trust
for his or her insurer, but the settlement does not clarify what portion of the
settlement is dedicated to the injury for which the insurer already compensated
the insured, how is the reimbursement from the insured to the insurer to be
calculated?”

The SCOV recognizes three general approaches to this
question. The first approach says that
the insurer gets the entire amount it paid out because the insured violated the
insurer’s subrogation rights by settling.
The second approach allows the insurer to recover only if the insured
has been made whole or the insurer provides proof of what portion of the
settlement went toward the already-recovered-for injury. The final approach “prorates the settlement
recovery between insurer and insured based on the settlement as a percentage of
the value of the verdict.”

The SCOV notes that it has in the past adopted some of the logic
of the second approach, referring to a 2005 worker’s compensation case. The SCOV reasons that, to be fair, a
prohibited “double recovery” only happens when an insured recovers in excess of
compensatory damages for the same injury.
The SCOV therefore remands to the trial court to determine the full
amount of defendants’ compensatory damages including all medical expenses and
holds: “To the extent that the settlement amount falls short of defendants’
full compensatory damages, including all of the medical expenses, GEICO’s
reimbursement must also be cut back proportionally. To the extent that
the court concludes that GEICO is entitled to less than the $10,000 it paid,
the court must recalculate GEICO’s share of defendants’ costs for reaching the
settlement with Liberty Mutual.”

So folks, remember that if you’re injured, someone else is at
fault, and your insurer pays you, that money comes with strings very much attached. As for the attorneys reading this, make sure
you take care of the liens when you settle a case—at least at that point you
can negotiate and not have your client potentially on the hook for the whole
amount. That’s never good.